Pittsburgh Versus Phoenix

Robert Bach, National Director, Market Analytics at Newmark Grubb Knight Frank: Which city is a better investment today, post the Great Recession, Phoenix or Pittsburgh? If you think you know the answer, think again.

I’m not referring to the NFL Steelers versus the Cardinals. If you had some money to invest in commercial real estate, which market would you choose, Pittsburgh or Phoenix? “Neither one” is not an acceptable answer. You have to choose one market or the other to deploy your capital.

These two markets are at polar ends of the growth and investing spectrum. Before the Great Recession, I’ll wager that most of you would have answered Phoenix. Sure, the barriers to entry for developers are minimal, but the economic profile was dazzling, not least because Phoenix and Las Vegas are the nearest big city beneficiaries of businesses and households leaving high-priced California. Pittsburgh, on the other hand, was plagued by the reputation of a dying Rust Belt city that was losing population – not just the municipality of Pittsburgh but the entire metropolitan area, city and suburbs combined. Phoenix was like Ryan Lochte while Pittsburgh was treading water.

But the Great Recession dramatically changed the fortunes of the two metro areas. Phoenix was devastated by the housing bust, losing 12.8 percent of its jobs and, so far, recovering only 29 percent of the lost jobs. To the surprise of many, Pittsburgh performed like a champ during the Great Recession, benefitting from decades of economic restructuring out of steel and into healthcare, education and energy. Pittsburgh lost 3.5 percent of its jobs from peak to trough but has already recovered all of those jobs and then some, one of the best job recovery records among all U.S. metro areas. The Great Recession was like a stress test. Phoenix failed and Pittsburgh outperformed.

Which market should an investor choose today? There’s not a right or wrong answer. It depends on your investment strategy and appetite for risk. Phoenix is a more volatile market with steeper highs and lows than Pittsburgh, even before the Great Recession. Pittsburgh, on the other hand, has been a steady if unspectacular performer and is likely to remain so.

Phoenix is already preparing for its next boom. Population growth, one of the most reliable indicators of long-term economic performance, has returned to Phoenix with the metro area adding 54,000 new residents in 2011 according to the U.S. Census Bureau. Pittsburgh has reversed prior losses and is growing again, but the area added less than 2,000 new residents in 2011. Although Phoenix trails Pittsburgh in its recovery, it is now growing at a faster pace with employment up by 2.9 percent over the most recent 12-month period, nearly double Pittsburgh’s 1.5-percent increase.

Looking beyond the labor market comparisons, real estate statistics are a closer call. Cap rates for office property sales averaged around 8 percent in both markets so far this year, according to Real Capital Analytics, about 80 basis points above the U.S. average. But the Phoenix market was more than three times as liquid as Pittsburgh in terms of the dollar volume of sales. On the leasing side, the edge goes to Pittsburgh where the average asking rental rate increased by 1.1 percent to $18.71 per square foot over the past four quarters compared with a 3.7 percent drop to $20.06 in Phoenix, where office rents have yet to find their bottom.

What’s the final conclusion? If your investment style puts a high premium on growth with upside potential for appreciation and you can tolerate the competition, go with Phoenix. If you don’t mind trading away future appreciation potential to get a more stable market that is already generating increases in rental income, Pittsburgh would be your choice. Investors across all asset classes – stocks and bonds as well as real estate – are on a quest for yield, because the Federal Reserve is keeping interest rates at record lows and promises it will do so until 2015. In this investment climate, I would put a premium on current income over future appreciation and give the nod to Pittsburgh.